EUR 850.00 For Business Accounts Only

Morningstar | Husky's Integration Pays Off

Husky Energy is one of Canada’s largest integrated energy companies, operating in western Canada, the United States, and the Asia-Pacific and Atlantic regions. The company continues to further its strategic transition toward low-sustaining-capital production, with sustaining capital costs approximating CAD 6 per barrel. We expect production from low-sustaining-capital projects, which includes oil sands production, to grow from 8% of total production in 2010 to approximately 55% by the end of the year. Improved efficiency on oil sands production affords the company with corporate cash break-even prices of $31/barrel West Texas Intermediate at current production levels, which compares favorably with peers.We believe that the market finally realizes the value of Husky's downstream and midstream operations. Accounting for approximately 30% of the company’s EBITDA, midstream and downstream operations help mitigate market volatility and capture refined product pricing for the company’s crude oil production. Ownership of midstream and downstream assets allows the company to control the transport of its own production, lowering the overall cost structure and capturing higher price realizations. Thus, leverage remains best in class among oil sands peers. Additionally, concerns about natural gas production in China appear overstated, despite causing repeated meaningful share price moves. Although Husky came to a favorable agreement with CNOOC over price realizations , concerns remain that CNOOC will attempt to renegotiate if low prices persist. Whatever transpires, natural gas production from China represents only 7% of Husky’s total production, and additional price declines will not have a significant impact on the company’s value.Even though Husky is in less of a position to benefit from advanced extraction technology than peers, its integrated corridors should help it generate cash flow. As such, we think that the market is overlooking the company’s integration and stable cash flows, and we see Husky’s stock as an undervalued opportunity for long-term investors. The stock is trading in 4 star territory, and we see upside at current levels.